Book Publishing and the Digital Age October 28, 2009

In the 10/22/09 issue of the Wall Street Journal was a short article on Steven King’s latest novel, Under the Dome. His publisher, Simon & Schuster has decided not to release the e-book edition until the day before Christmas, 2009. That’s six weeks after they release the hardcover edition, which retails for $35. The strategy here is to give bookstores both online and brick & mortar a chance to sell the more expensive hardcover edition well before the inexpensive (estimated retail for the e-book version is 9.99) digital edition.

At the same time, a price war between Amazon, Walmart, and Target has erupted. All three retailers are pursuing a loss-leader strategy of dramatic cost cutting on highly anticipated new hardcover books, which is designed to attract shoppers to their online sites.

Consumers are thrilled with the ability to buy first edition books from great authors at a dramatically reduced prices. However, publishers are chagrined at the long term effect of two trends that will not be going away: 1) loss-leader discounting of key book titles and 2) the emergence of the digital e-book reader. Under attack is the traditional publishing model of printing hardcover & softcover editions and selling them in bookstores and online retailers like Amazon. In the ‘old’ days, this model worked well and publishers made their money from the sales of high profile authors.

Truth be told, book publishers made money on the 80/20 model: 80 percent of their revenues came from 20 percent of their books. The percentages might vary a bit but I’m pretty close. The other 80% of their published titles during a year either broke even or lost money. So it’s a very tough business model from the get go.

For the moment, publishers are trying different distribution models like waiting a decent interval before releasing the cheaper e-book version.

My question for publishers: Why fight the digital age? Instead, grab a hold of it and look at the possibilities. How much do you think it costs a publisher to provide a hardcopy of a book versus an e-book version? Yes, it’s much more expensive to print a book than to distribute the e-book version, which we all know.

If it were up to me, I’d pursue a different strategy:

1) Print less hardcover books than usually required based on sales estimates. If you want a hard copy edition, you’ll have to be quick because there won’t be many of them. Instead of flooding the market with stacks of high-profile books, keep the supply limited. By limiting the supply of hardcover books, you create a different dynamic in the market. Of course, publishers are looking to sell as many copies as they can in order to cover the costs of the author advances paid and all the other costs associated with being a publisher. However, by purposely limiting the publishing production, you create an ability to keep hardcover book prices higher…and that’s where the second part of this strategy picks up.

2) Start moving your distribution fully into e-book versions sold on any and all e-book readers (by Amazon, Sony, etc). The advantages and quality of e-book readers will now begin to accelerate faster and faster as more competitors provide their own versions of e-book readers. Already, retailers like Barnes & Noble are introducing their own e-book readers. The idea is to switch the sales dynamic to 80% of books sales coming from e-book reader sales and 20% from ‘limited edition’ hardcover sales.

Think about it. You might make less total revenue but your margins are improved when you factor in the cost of providing an e-book version versus printing a hardcover version. Then factor in higher volume sales of the e-book version and you have a much improved and digitally supported business model.

I’m willing to bet that the trend over the next 5 years is a larger migration from hardcover dependence to e-book version flexibility. Will there be a market for hardcover books? Yes, but by making them in shorter supply, you reduce your overall costs and keep the margins on hardcover books stable. If you want a hardcover version, you’re gonna pay more. I’m willing to bet that the secondary market for books will become much more dynamic than it is today because of limited printed hardcover

Now, what impact would this model of embracing digital book publishing have on the heavy discounting, loss-leader wars conducted by Amazon, Walmart, and Target? In the long run, I think it makes their discounting less viable since we want the e-reader versions to become the larger volume of sales. If they want to discount the hardcover edition of a book, go for it. As a publisher, I’d rather rely on selling higher margin, high volume e-book versions as time goes on.

So, instead of trying to save the existing model of printing hardcover books in quantities that puts tremendous pressure on their ability to maintain margins, publishers should grasp the e-book revolution fully. Publishers should drive and lead the e-book business instead of following it.